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Fool on the Street: Chico's Ready to Start Fresh

Can Chico's get its act together in 2007?

Chico's(NYSE:CHS) had a really tough year in 2006. Although this is a retailer that was on fire for nearly a decade, 2006 really laid it low when the company stumbled for the first time in anybody's recent memory. Its shares have fallen 52% over the last 12 months. However, it seems like an apt time to check out Chico's management's presentations at two recent Wall Street conferences -- the Ninth Annual ICR XChange and the Cowen & Co. 5th Annual Consumer Conference -- to see what's going down at Chico's.

It's the merchandise, stupidIt's been well known that Chico's missed the boat when it came to stocking the right merchandise assortments in recent history. Chico's CFO, Charlie Kleman, admitted in the presentations that Chico's has dropped the ball when it comes to leadership in the baby boomer market when it comes to products and innovation.

It sounds like Chico's is definitely working on this, but it may be a gradual turnaround. Kleman said that while some innovative new products should be flowing through the spring lines, "We should have the innovation cracked by fall."

On the other hand, here's some reason for investor cheer. In the short term, expect margins to take more of a beating, since Chico's says it has been aggressively marking down unsuccessful merchandise in order to move it on out of there. The company said the stale product should be gone by the end of the year. I know it sounds strange to be cheerful, but that means that Chico's can start fresh, and that's why it's something investors can be looking forward to in 2007 -- at least Chico's won't have a large overhang of stale merchandise that just isn't doing it for customers.

If you're worried that Chico's customers gave up on the retailer, there's more good news in that they're still around. Chico's management pointed out that despite the lack of success of the earlier assortments, transaction count was up for both Chico's and White House/Black Market in the first two months of the fourth quarter. Unfortunately, these customers weren't willing to pay full price, and there's the rub -- and that's why Chico's has got to get itself in gear to provide that innovative, must-have merchandise to its baby boomer customers.

More ways to woo the customerChico's said another area it's working on growing is its direct-to-consumer segment, which is growing but has potential for more highly profitable growth. (Management noted that direct-to-consumer initiatives have been a successful model for two rivals, J. Jill -- now owned by Talbots(NYSE:TLB) -- and Coldwater Creek(NASDAQ:CWTR), both of which started as catalog retailers and then grew into a bricks-and-mortar presence.)

Along those lines, although Chico's has discontinued its television advertising, it is working on its catalog offerings, planning to spend roughly the same amount on marketing on the catalogs as it did for TV campaigns. The company's chief marketing officer, Michael Leedy, is working on transforming the Chico's catalog into more of a lifestyle catalog. In addition, the company is working on freshening up the branding for Chico's, White House/Black Market, and intimate apparel line Soma.

Last but not least, the company talked about its loyalty programs. Its Passport program for Chico's is pretty well known as a success in the retail universe, and it turns out it's helpful in introducing Chico's customers to other retail stores, such as Soma By Chico's. White House/Black Market also has the cleverly named Black Book loyalty program; although it's just a little bit over a year old it sounds like a success so far, since it was described as running ahead of Chico's program.

Fatigued by Fitigues and over undiesChico's purchased the small chain Fitigues early last year. However, so far it doesn't seem to be getting off the ground. Management said it's still working on the concept, which originally provided "luxurious, comfortable" clothing for the same age demographic as Chico's. I admit, I thought the idea made sense when I first heard about it, but at this point in the game it doesn't seem like much headway has been made. I'm guessing with such a tough year it would have been unwise to work on this smaller concept, but it should be interesting to see if some headway is made in the coming year.

The retailer's intimate apparel business, Soma (also known as Soma By Chico's), is also interesting. Since intimate apparel is a low-margin business -- and management also pointed out that women shop for intimate apparel less frequently than for apparel -- Chico's has its work cut out for it in terms of getting this one off the ground and getting enough stores opened to boost gross margins. Furthermore, Chico's admitted that several intimate apparel launches were failures, although it said the success of its Travelers line as well as active wear and apparel at Soma are helping to offset those stumbles.

Interestingly, although most of Soma's customers are currently Chico's customers, there is movement in terms of Soma branching out. Chico's has already opened one Soma store without the "By Chico's" byline, with more such stores on the way, and it plans to try to increasingly focus on luring non-Chico's customers to Soma with initiatives starting this year.

Out with the old, in with the newIt really has been a tough year for Chico's, and its share price has definitely reflected the fact that investors are not used to such disappointments from this retailer. And of course, they must have been fretting about the possibility that maybe Chico's customers were defecting to rivals, like Talbot's, Coldwater Creek, Ann Taylor(NYSE:ANN), and maybe even Gap's (NYSE:GPS) new concept, Forth & Towne.

While it does sound like 2007 is still going to be a bit touch and go for Chico's in terms of getting things back on track, it's good to hear management admitting pretty major mistakes and discussing how it's going to fix them. (Other coming initiatives include adjusting payroll expense to ensure better customer service and expanding some Chico's and White House/Black Market stores' sizes.) Of course, I'm sure many of us are anxiously awaiting the new innovative styles promised this year, and the proof will be in the pudding when it comes to how customers will respond.

As I've said in the past, it's inevitable that any retailer will make mistakes sooner or later (and let's face it, examining the past nine or 10 years illustrates it was later for Chico's). Given the fact that Chico's has been historically well run, I can't help but think that these are temporary tough times, and fresh starts in 2007 will help this retailer get back on its long-term track.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax